Be careful of mortgages greater than 100%

Recent mortgage offerings have been encouraging 100%-plus mortgage deals. A new selection of ‘supersize’ mortgages aims to help first-time buyers with debts and no deposit to get on the property ladder.

But customers are being warned about the potential dangers.

Alliance & Leicester introduced a 125% mortgage in April, so for a property worth £100,000, you could borrow £125,000, use the extra to pay for things like stamp duty, instant home improvements or to clear other debts.

Others to offer 100%-plus deals are Bradford & Bingley, Birmingham Midshires, Mortgage Express, Coventry, Northern Rock and Scottish Widows. Others are offering 100% mortgages, which therefore require no deposit. These include HSBC, NatWest, Bristol & West, Co-operative Bank and Portman.

As the number of these deals on offer increases, the number of borrowers taking advantage of them has also gone up, almost doubling in the last year according to brokers. It doesn’t come as a surprise to industry experts. Rising rents and such outgoings as student loans are making it harder for first-time buyers to save enough for a deposit. And as they do save, house prices are going up at a faster rate, so they’re falling further and further behind. Obviously 100%-plus deals therefore look very attractive. But prospective customers should look carefully before they dive in.

Borrowers should look particularly at three key aspects of a mortgage.

The first is interest rates
Lenders charge top rates for 100%-plus mortgages. Portman are offering a 100% loan and a two-year fixed rate of 6.35%. However, if you can afford a 5% loan, you can get a fixed rate for two years as low as 5.49%. Alliance & Leicester’s 125% loan deal will depend on the application fee you pay, but two-year fixed rates range from 5.64% to 6.74%. However, if you have a deposit of 5% you can get a two-year fixed rate of 5.39%, and rates are lower for borrowers with more deposit money.

Such differences in interest rates may a significant difference to monthly repayments, making any sort of a deposit very important to muster.

Secondly, consider negative equity
It is highly possible that house prices might take a downturn in the coming months. The rate of house price increases has slowed down in the last months, and in some regions house prices did actually go down. If this happens when you’ve got a 100% loan, then you can quickly end up in the situation where your loan is worth more than your house. When you are borrowing more than 100% this is the situation you are in straight away, with a property worth less than your borrowings. If the general trend of rising property prices continues in the long term then in a few years your loan should be worth less than your property, but starting from negative equity makes it tougher to climb the property ladder. And if things get really awkward, owners of negative equity properties cannot simply return the keys, shrug their shoulders and walk away – they are still liable of the difference.

Thirdly, borrowers should think about re-mortgages
With the rise in house prices over the last few years, any buyers who took out 100% or 100%-plus mortgages some years ago should have plenty of equity in their homes by now. Their initial fixed rate interest deal has also probably come to an end. That makes it a very good time to look at a re-mortgage deal. Buyers who took out a 100% deal in 2004 may find their loan is now worth only 70% of their house value now – a good situation to be in. This would give the owner a wider range of mortgage deals and the possibility of a lower interest rate, despite recent rise in interest rates across the market.

But that situation may take a lot longer than three years to reach in the current house price and mortgage climate. If a 100%-plus borrower takes out a two-year fixed rate today, he/she may find in two years time that their house value is lower, and the mortgage rates on offer are higher, so they’ll end up in an even worse position that where they’re starting from.

Getting on the property ladder is a tough game these days. People are desperate to get on board and will look at every way possible to get themselves a property. But doing so with a mortgage of up to 125% may not be the best way. It will certainly pay a prospective first-time buyer well to spend some time working through the figures for many years in the future and considering some ‘what-if’ and worst-case scenarios. The best answer may be to try and raise as much money as you can for a deposit and not take the seemingly quick and easy route to a big mortgage.